The Bush Administration Rescue Plan For Poland: Shooting Ourselves In The Wallet?

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The Bush Administration is expected imminently to announce a package of well over $1 billion in economic and financial benefits for Poland from the United States and multilateral organizations. It is reported to feature:

  • special assistance for Poland through a $250 million World Bank program and a $300 million disbursement under an International Monetary Fund (IMF) program;

  • special tariff exemptions for U.S. imports of Polish goods through the Generalized System of Preferences (GSP);

  • $250 million in U.S. trade financing through government guaranteed loans;

  • U.S. government-backed insurance and loans in support of American private investment in Poland, i.e., through Overseas Private Investment Corporation (OPIC) program eligibility; and

  • U.S. support for the rescheduling of $700 million (and eventually billions more) of Poland’s external debt in the Paris Club of government creditors.

In light of recent developments in Poland, the Bush Administration’s desire to foster greater freedom for the Polish people and encourage freer markets is understandable. Its planned initiatives meant to advance these objectives, however, are open to serious challenge on four grounds: the tasks expected of the International Monetary Fund; the new burdens likely to be imposed on Western taxpayers; the financial "free-ride" provided the Soviet Union; and adverse impact on U.S. interests in developing countries.

Problems With the Bush Administration Plan

Can The IMF Solve Poland’s Economic Crisis?: The most significant flaw in the Bush Administration’s new Polish plan is its call on the IMF to help solve Poland’s economic problems by serving as the enforcer of economic austerity and catalyst for Western investment there. What is actually required to salvage the Polish economy — namely, fundamental systemic reform — is, for all intents and purposes, outside the IMF’s mandate. Far from eliminating the present crisis, a traditional IMF-style approach will almost certainly not produce the desired economic transformation; it may, moreover, serve to introduce still more serious societal upheaval.

The principal reason for such a pessimistic assessment is that the IMF and World Bank are obliged in structuring their programs to take as a given the existing political and economic systems of prospective borrowers. Accordingly, where the IMF has been involved in the past with socialist countries, it has been unable to tie its assistance to the creation of genuine free-market economies. Instead, the International Monetary Fund is essentially confined in such lending to utilizing austerity-oriented adjustments — fine-tuning macro-economic policies — that amount to tinkering on the margins of failed economies. Examples include:


  • Successive IMF programs for Yugoslavia which currently has an annualized inflation rate approaching 1,000 percent.

  • Notwithstanding past IMF involvement, Romania remains a Stalinist command economy ravaged by collectivization and other inefficiencies.

  • Repeated IMF programs to which Hungary has subscribed since the early 1980’s — a nation that today has a level of per capita indebtedness even greater than that of Poland (on the order of a $19 billion gross hard currency debt burdening a population of roughly 10 million).

Like its sister socialist economies, Poland has previously experimented unsuccessfully with austerity measures unaccompanied by profound structural change. Although not implemented under IMF auspices, several of the methods typically utilized by the IMF have been tried at the urging of Western creditors. Notably, raising prices, holding down wages and similar measures provoked large-scale labor unrest — but not measurable improvement in economic performance — under the regimes of Gierek, Kania and Jaruzelski.

As yet largely untouched are the structural contributors to Poland’s economic stagnation, for example:


  • Key heavy industries (e.g., mining and manufacturing, shipbuilding, etc.) that remain state-owned and -controlled — a bottleneck that "workers self-management" cannot overcome;

  • Thousands of unproductive agreements between Polish and other Soviet bloc enterprises that waste precious resources under rigid, pre-set plans;

  • Disproportionate Polish investment in the military (approximately $14 billion annually in 1986, the last year for which such data is publicly available) and uncounted billions more to support the nomenklatura and a bloated government bureaucracy.

The foregoing does not gainsay the vital role played by the International Monetary Fund where its austerity measures and other macro-economic adjustments can work. Indeed, IMF programs have produced substantial and enduring economic progress in many developing countries — where there is viable private sector unfettered by excessive governmental controls. However, particularly in nations like those of Eastern Europe, where the burdens of ideological and institutional constraints are so pronounced, the utility of the IMF and its tools is exceedingly limited.

Are Western Taxpayers Going to Foot the Bill?: It is striking that the Bush Administration and the allies, in proposing these economic initiatives toward Poland, are calling for such steps only a few short years after the American taxpayer was obliged to pay in excess of a billion dollars to cover Poland’s de facto default on debt to the U.S. Export-Import Bank, the Commodity Credit Corporation, and other U.S. government-backed programs.

The economic implications for U.S. taxpayers of this latest bail-out scheme for Poland will be greater still for it comes in the midst of several, potentially staggering financial demands on U.S. tax revenues:


  • a probable $100 billion-plus price tag over the next ten years related to the savings and loan crisis;

  • an estimated $25-50 billion over the next five years from losses incurred in connection with the $1.3 trillion international debt crisis;

  • and possibly billions of dollars of lost tax revenue due to the failure of companies purchased under bank-financed leveraged buy-outs, following a rise in interest rates — or even a mild recession.

A substantial portion of these ominous taxpayer liabilities are the result of woefully inadequate discipline in government and commercial bank lending policies, both domestically and internationally.

Will the Soviets Get A "Free-Ride"?: As it now stands, the Administration is making no demands that Soviet hard currency credits, loan guarantees and related commitments accompany Western economic and financial assistance to Poland.

This glaring omission facilitates the Soviet Union’s effort to "internationalize perestroika," i.e., to off-load the financial obligations of its impoverished allies and client-states from Soviet books to Western balance sheets.

This is the more ironic insofar as the Soviet Union bears enormous responsibility for Poland’s present economic crisis.


  • It has served as the model of the autarkic command economy that East bloc countries like Poland have largely been forced to emulate.

  • The Soviets have long pressured Poland to increase its participation in COMECON, the Soviet bloc’s economic community, in high technology and trade cooperation.

  • Total trade turnover between Poland and Soviet bloc (COMECON) countries amounted in 1987 to $35.7 billion — nearly twice the $20.1 billion run up in 1980. During the corresponding period, Poland’s trade with developed countries actually dropped from $12.6 billion to $10.2 billion.
  • These figures indicate that the Polish economy may, ironically, be being further absorbed into Soviet-controlled CMEA economic relations — despite the West’s policy of "differentiation," whose stated aim is to "wean" Eastern Europe away from the Soviet orbit.


  • The Soviets have, compared to the West, been relatively niggardly with their financial assistance to Poland (e.g., no effort made to reduce prices charged for Soviet oil or to cut claims on higher quality Polish exports — goods that might otherwise be sold in hard currency markets, etc.) since the onset of the crisis in March 1981.

Will U.S. Equities in Developing Countries Be Jeopardized?: The industrialized West’s decisions aimed at assisting Polish perestroika coincides with the emergence of severe economic and political dislocation in Mexico, Venezuela, the Philippines and other developing countries — all of whom desperately need to make progress in implementing serious debt reduction and "new money" programs.


  • For too long, the West has, in some key categories, accorded Warsaw Pact borrowers preferential treatment (i.e., better credit terms and access to fresh credit flows) over those of Latin American and other democracies.

  • For example, the Polish government’s practice of paying interest on commercial bank loans while withholding interest payments to government creditors is a dramatic departure from practices agreed to in debt negotiations with non-communist countries.

    Permitting this arrangement to continue, in effect, subordinates Western taxpayers to private commercial banks when it comes to repayments on outstanding debt.

An Alternative Plan

Since the Bush Administration’s planned package of economic and financial assistance to Poland may have unintended and undesirable repercussions both for the Poles and for the American taxpayer, a different package of initiatives is urgently needed. An alternative plan should be implemented that is designed to advance U.S. and Western interests in true reform in Poland while: limiting taxpayer liabilities, denying the Soviets a financial "free-ride," defending equal — or better — treatment for developing countries and minimizing the prospects of yet another "false start" on Poland’s road to radical political and economic reform.

Key features of such an alternative plan would be:

  • Properly Utilizing the IMF


    • Massive privatization of the Polish economy, including key heavy industries and agriculture;

    • The reallocation of priority resources away from the military sector and unproductive COMECON endeavors to the destitute civilian economy;
      • An important and visible feature of this reallocation process would be the conversion of extensive military infrastructure to civilian production — particularly weapons production dedicated to supplying Soviet end-users;

      • The Polish government should commit to disengage gradually from COMECON and formulate a realistic program to wind-down its participation in that community;


    • Sharp reductions in the size of the bloated government bureaucracy and the expensive privileges enjoyed exclusively by the nomenklatura — as opposed to reducing further the living standards of ordinary Polish citizens.

    • Implementation of comprehensive measures designed to address Poland’s chronic environmental hazards.


    • It is crucial that these milestones be publicly identified and debated prior to any "new money" flows so that the West is engaging in a transparent and measurable process of economic assistance.

    • In addition to economic criteria, these milestones should also encompass expanded democratic pluralism and the institutionalization of individual freedoms, including private ownership and transferability of property.
  • Release of IMF funds should be withheld pending a demonstration by the Polish leadership over the next six-months of its willingness to implement fundamental reforms such as:

    If and when the Polish authorities demonstrate the political will to implement such a program, the alliance should agree on specific goals — and specific milestones for achieving these goals — upon which all disbursements of funds from various sources (e.g., bilateral government loans and credit lines, World Bank co-financing, etc.) will be made contingent.

    All Western financial assistance measures intended to stimulate Polish reforms — such as IMF support, Paris Club rescheduling, OPIC coverage and GSP eligibility — must be fully reversible in the event of subsequent political crackdowns, financial default, or other missed milestones.


  • Protecting Western Taxpayers


    • Western government creditors should, in all cases, be accorded equal or pari passu treatment with private bank creditors in debt rescheduling negotiations.


    • Interestingly, the finance ministers of several important U.S. allies (notably the United Kingdom and the Netherlands) object to such a transfer of risk to governments and taxpayers (including through the IMF and World Bank) that is a feature of the Brady Debt Reduction Plan for developing countries.
  • A firm alliance agreement is required at the outset of these new initiatives to insulate Western taxpayers to the maximum extent possible from the consequences of potential default or successive debt reschedulings on the part of the Polish government and associated enterprises.

    A financial rescue package for Poland should not transfer risks to Western governments and taxpayers as a way of covering and thereby encouraging loans from the commercial banks.


  • Ensuring that the Soviets Bear Some of the Costs


    • To meet the Soviet Union’s substantial financial responsibilities for Poland, the allies should also urge Moscow to set aside a multi-billion dollar collateralized hard currency account (e.g., funded by pledged oil and gold-generated revenues) to cover Western creditors in the event of Polish arrearages under the new program.
  • The Western allies should secure Soviet agreement to provide Poland with extensive hard currency credits for projects and other purposes requiring hard currency within Poland. In this way, finite IMF/World Bank resources can be husbanded to meet the enormous claims of the developing world.

    The allies should insist that the Soviet Union cut further its oil prices for Poland and that Warsaw be excused from large Soviet/COMECON projects, either underway or contemplated, particularly in the energy and high-technology fields.


  • Protecting U.S. Equities in the Developing World


    • Such an arrangement would reduce the prospects of Mexico, Venezuela, the Philippines and other countries being disadvantaged in their quest for serious debt reduction.

    • The terms and conditions of any further Paris Club reschedulings for Poland — a form of debt relief that should be withheld for the six-month trial period called for above — must be publicly debated before they are finalized.
    • Otherwise, the West is in jeopardy of creating additional precedents for mechanisms whereby preferential economic and financial treatment is provided to Soviet bloc countries.

  • Soviet bloc countries should obtain no more favorable terms on or access to Western financial flows than those offered fledgling democracies in the developing world.



New Western financial resources for Poland should be withheld if it becomes evident that the Polish government is engaged in provocations designed to undermine the credibility of Solidarity and other fledgling democratic organizations. In this connection, some observers believe that the Jaruzelski regime may be cynically offering the opportunity for expanded political participation to Solidarity and other such organizations at a time when radical economic restructuring will necessarily spawn economic hardship and fierce political resentment on the part of the Polish people. The predictable backlash could actually help Jaruzelski discredit the independent trade union movement in Poland — while at the same time reinvigorate the weakened communist party.

As they are asked once more to assume substantial financial exposure in order to assist the more destitute regimes of Eastern Europe, Western taxpayers should keep in mind one fact: the current economic crisis in Poland has been deepened by undisciplined Western largesse over the past fifteen years or more. The temptation to respond again to Eastern regimes’ liberalization half-steps with renewed, imprudent capital and technology flows would amount not only to throwing good money after bad; it will likely retard political and economic reform in Poland and elsewhere. The only hope for genuine reform in the Soviet bloc is the adoption by the United States and its allies of security-minded policies designed greatly to increase the discipline and transparency of all Western economic, financial and technology transactions with the USSR and its clients.

Center for Security Policy

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